The Centers for Medicare & Medicaid Services (CMS) issued several changes to the Stark Law regulations earlier this year. These include the recently issued Phase III final regulations issued pursuant to the Stark Law, effective December 4, 2008 (the Phase III final rule or Phase III), and the annual Medicare Physician Fee Schedule changes, effective January 1, 2008 (the 2008 MPFS). Following is a summary of those material changes and their impact on common arrangements between physicians and entities to which they refer for designated health services.

1.  Physicians Associated with Certain Physician Organizations Will Be Treated as Standing in the Shoes of Their Physician Organizations

To address perceived concerns about the manipulation of indirect compensation relationships, Phase III CMS determined that it will treat certain physicians as standing in the shoes of their “physician organizations.” Although in the past a referring physician was treated as having an indirect compensation relationship in those situations where the physician’s group practice had a direct contract with an entity furnishing DHS, after December 4, 2008 (the Effective Date), CMS generally will treat such physicians as having a direct relationship with the entity furnishing DHS, since the referring physician will be deemed to stand in the shoes of his or her group practice.

However, CMS recognizes certain limitations to the applicability of the “stand in the shoes” concept. First, the concept will only apply in those situations where the “physician organization” is the only intervening entity between the referring physician and the entity furnishing DHS. Second, the concept will apply only in analyzing compensation relationships, not in analyzing ownership and investment interests. Third, CMS is taking the position that a physician only stands in the shoes of his or her professional corporation, physician practice or group practice.1 Hence, a physician’s financial relationship with a management company or equipment leasing company would not imply the “stand in the shoes” concept. Fourth, CMS has recognized a limited “grandfathering” for purposes of the “stand in the shoes” concept. And finally, CMS has further delayed the effective date of certain arrangements potentially subject to the application of the “stand in the shoes” concept.2

What this means is that, as of the Effective Date, all compensation arrangements involving physician organizations should be structured so that the direct relationship between the DHS entity and the referring physician, as created by applying the “stand in the shoes” concept, complies with a direct compensation exception applicable to the arrangement. Grandfathered are those arrangements already in effect as of the Effective Date that were structured to comply with the indirect compensation exception and are either in their current terms or current renewal terms. Thus, CMS is not requiring a restructuring of current arrangements. Such arrangements, however, will need to be restructured to take into account the “stand in the shoes” concept after the current term or renewal term expires. For instance, if the current term of an agreement between a hospital and a group practice is set to expire or renew on June 30, 2008, the agreement does not have to take into account the “stand in the shoes” concept until July 1, 2008. It appears that the delayed effective date would be July 1, 2008 regardless of whether the agreement provides for automatic renewal past that date.

Additionally, CMS is delaying the applicability of the “stand in the shoes” concept for:

  • Academic Medical Centers (AMCs) with respect to compensation arrangements between a faculty practice plan and another component of the same AMC; and,
  • Integrated Section 501(c)(3) health care systems with respect to compensation arrangements between an affiliated entity furnishing DHS and an affiliated physician practice.3

2.  The Physician Recruitment Exception Is Somewhat Expanded

The physician recruitment exception permits hospitals, federally qualified health centers (FQHCs) and rural health clinics to provide financial assistance directly to a physician as long as it is intended to induce the physician to relocate his or her individual practice to the “geographic area served by the hospital” and the recruited physician becomes a member of the hospital’s medical staff. The Phase III final regulations modified the physician recruitment exception to clarify the previously ambiguous language and to provide greater opportunity and means for hospitals, FQHCs and rural health clinics to recruit physicians. This greater scope of recruitment possibilities, however, creates a complex regulatory scheme. The modifications of the Phase III final regulations largely affect the following areas: (i) the definition of the “geographic area served by the hospital”; (ii) the relocation requirement; and (iii) certain criteria for recruitment arrangements involving group practices.

Geographic Area Served by the Hospital

The recruitment exception requires that the physician relocate his or her practice to the geographic area served by the hospital.4 In the Phase II final regulations, CMS defined the geographic area served by the hospital as the “lowest number of contiguous zip codes from which the hospital draws at least 75% of its inpatients.” This zip code method for defining the hospital’s service area has been criticized and caused much commentary.

Although Phase III did not do away with this requirement, CMS has attempted to make the determination of the geographic area served by a hospital more flexible. In Phase III, CMS continues to require the geographic service to be comprised of the lowest number of contiguous zip codes that comprise the area from which the hospital draws 75% of its inpatients; however, CMS provided clarification about acceptable methods for determining that geographic service area. CMS also clarified that if the hospital is within a larger health care system, the geographic service area is that area served by the hospital, rather than the geographic service area of the health care system.

Those clarifications include:

  1. The zip codes need to be contiguous to each other, but not necessarily to the zip code in which the hospital is located.
  2. A recruited physician may relocate his or her practice to a zip code not counted among the contiguous zip codes (a donut hole), as long as the contiguous zip codes from which the hospital derives 75% of its inpatients surround that donut hole zip code.
  3. If a hospital draws fewer than 75% of its inpatients from all of the contiguous zip codes from which it draws patients, the hospital’s service area may be deemed to include all those contiguous zip codes from which it draws inpatients.
  4. If a hospital can meet the applicable threshold for inpatients (i.e., 75% or 90% for rural hospitals5) using multiple zip code configurations, the hospital may use any one or more of the configurations. Consequently, the hospital can use different geographic service areas for different recruitment arrangements as long as the service area requirements are met on the date the recruitment arrangement is entered into with the physician.

Relocation Requirement

Under the Phase II regulations, a recruited physician satisfied the physician recruitment exception’s relocation requirement if: The physician moved his or her practice at least 25 miles; or The physician established a practice with a substantial base of new patients from which at least 75% of the physicians’ revenues from professional services is provided to patients not seen or treated by the physician in his or her prior medical practice during the three years prior to the relocation.

Following Phase II, there was some confusion about whether the physician relocation element was satisfied if the physician did not move his or her practice from outside the hospital’s service area to inside the service area, but still met one of the two tests described above.

The Phase III regulations resolved this confusion by clarifying that to meet the relocation requirement; both of the following criteria must be met:

  1. The recruited physician must move his or her practice from outside the hospital’s geographic service area to inside the hospital’s geographic service area; and,
  2. The relocated practice must either relocate at least 25 miles or derive 75% of its patient revenues from “new” patients.

CMS also clarified the instances in which the relocation requirement does not apply. For example, CMS in Phase II recognized that medical residents and physicians in practice less than one year have little or no practice to relocate, thus recruitment of such physicians need not meet the relocation requirement. In Phase III, CMS clarified that a medical residency includes all postgraduate training, including fellowships. CMS also expanded the range of physicians not subject to the relocation requirement to include those physicians employed on a full-time basis for at least two years preceding the recruitment arrangement by:

  1. A federal or state bureau of prisons or similar entity operating a prison;
  2. The Department of Defense or Department of Veterans Affairs to serve active or veteran military personnel and their families; or
  3. An Indian Health Service facility to serve patients who receive medical care exclusively through the Indian Health Service.

If, however, the physician maintained a private practice while also employed by any of the above entities, the recruited physician is subject to the relocation requirement. In addition, CMS’s commentary to the Phase III regulations suggests that the elements of the relocation exception will be strictly applied. Thus, if a physician leaves private practice in a hospital’s service area to work for the Veterans Affairs office for just one year, the relocation requirements would apply to this physician upon returning to the hospital’s service area.

Recruitment into a Group Practice

In the Phase III final rule, CMS has clarified the guidelines for recruiting a new physician into an existing group practice.6 CMS makes it clear that an existing group may not allocate more than its actual additional incremental costs attributable to the recruited physician under an income guarantee, regardless of how the income guarantee was classified. CMS also created a narrow exception for hospitals located in a rural area or a Health Professional Shortage Area (HPSA). In those areas, if a recruited physician is replacing a deceased, retired or relocated physician, then the group practice may allocate to the recruited physician a per capita allocation of the practice’s aggregate overhead and other expenses, not to exceed 20% of the practice’s aggregate costs.

The Phase III regulations also clarify which expenses may be characterized as recruitment expenses. Specifically, expenses incurred by the existing practice in recruiting the physician to join the practice are recruitment expenses; expenses incurred after the recruited physician joins the practice are not. CMS provides examples of qualified recruiting expenses, which include: recruiter fees, travel expenses, meals, telephone calls, moving expenses, expenses associated with visits to the service area by the recruited physician and his or her family and tail insurance coverage covering the physician’s prior practice. Compensating the existing practice for time spent recruiting the physician is not, however, a qualified recruitment expense.

Another significant change in the Phase III regulations is that practice restrictions provisions are no longer categorically prohibited in agreements between group practices and recruited physicians. Thus, today, a group practice may include a noncompete or other practice restriction in a recruited physician’s underlying employment agreement as long as the restriction does not unreasonably restrict the physician from practicing medicine in the hospital’s geographic area. Please note, CMS’s limitation may be more stringent than state law requirements for the enforceability of noncompetes. Specifically, for Stark III compliance, the restriction must permit the recruit to continue to practice within the hospital’s service area. State law may permit practices to exclude physicians from practicing within a 30-mile range or more, which may be outside a hospital’s service area. Therefore, the group practice must ensure that any practice restriction proposed under an agreement does not violate state or local law because if it is found in violation, it may be deemed an unreasonable restriction and, consequently cause the financial relationship not to comply with the physician recruitment exception.

In clarifying the practice restriction revision, CMS explained that the following restrictions would not be viewed as unreasonable restrictions:

  1. No moonlighting;
  2. No solicitation of the group practice’s employees and patients;
  3. Mandatory acceptance of Medicaid and indigent patients;
  4. Prohibition of the use of the group practice’s confidential and proprietary information;

Requirement that the recruited physician to repay the group practice losses that are in excess of any hospital recruitment payments; or Requirement that the recruited physician pay a preset amount of reasonable damages (i.e., liquidated damages) if the physician leaves the group practice and remains in the community.

Finally, in Phase III, CMS confirms that the written agreement between the hospital and the recruited physician must also be signed by the group practice if payments are to be paid directly to the group and then passed on to the physician. Moreover, a hospital may require the existing group to guarantee the recruited physician’s repayment obligation to the hospital. This practice, however, must not eliminate the physician’s obligation to reimburse the hospital should the group draw on the guarantee. CMS is concerned that removing financial responsibility from the recruited physician may result in prohibited remuneration to the group practice or the recruited physician, which may create liability to the parties under the fraud and abuse laws.

3.  The Scope of the Purchased Diagnostic Test Rule Is Substantially Expanded

After considering the issue during the past two Medicare physician fee schedule update periods, in the 2008 MPFS, CMS has issued a final rule that significantly expands the scope of the so-called “purchased diagnostics rule” (the Purchased Diagnostics Rule). Specifically, effective January 1, 2008, the Purchased Diagnostics Rule is expanded so that it applies to:

  • the technical component (TC) of a diagnostic test whenever:
    • a “billing physician or other supplier” (or another party related to the “billing physician or other supplier” via common ownership or control (a Related Entity)) purchases the TC from an “outside supplier”; or
    • the TC is performed at a site other than the “office of the billing physician or other supplier”; and,
  • the professional component (PC) whenever:
    • a “billing physician or other supplier” (or a Related Entity) purchases the PC from an “outside supplier”; or
    • the PC is performed at a site other than the “office of the billing physician or other supplier.”

CMS does not define “purchase” for purposes of the application of the Purchased Diagnostics Rule, but in its commentary to the final rule, however, asserts that “reassigned tests are functionally the equivalent of purchased tests.”7 CMS does not provide any support for this position, however.

An “outside supplier” is defined as “someone who is not an employee of the billing physician or other supplier and who does not furnish the test or interpretation under a reassignment that meets the requirements of 42 C.F.R. § 424.80” (the exceptions to the reassignment rules).

CMS defines the “office of the billing physician or other supplier” as “the space where the physician or other supplier regularly furnishes patient care.” If the “billing physician or other supplier” is a “physician organization” (as defined in Phase III), the “office of the billing physician or other supplier” is the space in which the physician organization provides substantially the full range of patient care services that the physician organization provides generally.8

The Impact of the Purchased Diagnostics Test Rule

In those situations where the Purchased Diagnostics Rule applies, the effect is not to prohibit such arrangements (that being the province of the Anti-Kickback Statute and the Stark Law), but rather to limit the billing physician or supplier’s ability to profit from the diagnostic test; that is, the billing physician or supplier is generally prohibited from marking up the applicable component to an amount greater than that for which it purchases the applicable component (the so-called anti-markup provision).

As expanded, the anti-markup provision means that Medicare payment (including applicable coinsurance and deductibles) for the component of the diagnostic test subject to the Purchased Diagnostics Rule will be the lesser of:

  • The performing supplier’s net charge to the billing physician or other supplier;
  • The billing physician or other supplier’s actual charge; or
  • The fee schedule amount if the performing supplier had billed the component directly.

In the final rule, CMS places the burden of calculating the net charge for a particular component on the billing physician or supplier. In those situations where it may be difficult to calculate the performing supplier’s net charge, CMS suggests that billing physicians and suppliers “structure arrangements so that the anti-markup provisions do not apply . . . or use a payment method (such as a per-procedure) that yields an easily ascertainable net charge.”9 Otherwise, CMS requires that the net charge calculation methodology be reasonable and that contemporaneous documentation of the methodology and supporting data be retained.

Further, CMS continues to require in the final rule that net charge be determined without regard to any charge that reflects the cost of equipment or space obtained by the performing supplier from the billing physician or other supplier. For example, if the performing supplier charges the billing physician $100 per TC and rents the equipment from the billing physician at $50 per test, the net charge would be $50 instead of $100 because CMS requires that the performing supplier deduct the cost of the equipment obtained from the billing physician in calculating the performing supplier’s net charges.

It is noteworthy that in its commentary to the final rule, CMS rejected a commenter’s suggestion that this requirement be expanded to cover the costs of other “services (such as insurance) obtained from the billing supplier.”10 CMS did indicate, however, that it will monitor relationships between performing suppliers and billing physicians or suppliers, and will modify this provision in the future if it is necessary to prevent gaming of the anti-markup provision through the sale of goods and services.

In response to a commenter’s concern regarding developing different payment rates applicable to Medicare patients and non-Medicare patients (e.g., charging components subject to the anti-markup provision on a per-procedure rate to easily ascertain the net charge while charging non-Medicare billed components on a per diem or salary basis). In the final rule, CMS suggests that it will closely scrutinize such arrangements to determine whether costs are inappropriately shifted to Medicare or whether, as a result of such variance, the billing physician or supplier’s charges to Medicare are substantially in excess of the billing physician or supplier’s usual charges, which can result in program exclusion. Depending on the referral relationships between the parties, such arrangements could also raise concerns under the Stark Law and the Anti-Kickback Statute.

Please understand that the carrier becomes aware of the application of the Purchased Diagnostics Rule through information that must be reported by the billing physician or supplier. Specifically, the billing physician or supplier must identify the performing supplier and indicate the performing supplier’s net charges on its claim form by completion of Items 20 and 32a of the CMS 1500 form. Failure to appropriately identify a purchased diagnostic service could constitute a false claim. Further, failure to appropriately report the supplier’s net charge could also constitute a false claim.

Examples of the Expanded Scope of the Purchased Diagnostic Test Rule

To illustrate the potential impact of these changes in the 2008 MPFS, CMS provides the following examples:

  • Example #1 A urology group contracts with a leasing company that supplies a technician and a pathologist to perform tests on prostate samples. All work is performed in space outside the “office of the billing physician or supplier” that is rented by the urology group on a 24/7 exclusive basis. In this example, CMS takes the position that the Purchased Diagnostics Rule would apply to both the PC and the TC of the tests.
  • Example #2 Same facts as Example #1, except the technologist is an employee of the urology practice; that is, the employed technologist performs tissue sampling in the space outside the “office of the billing physician or supplier” that is rented by the urology group on a 24/7 exclusive basis. Again, CMS takes the position that the Purchased Diagnostics Rule would apply to both the PC and the TC of the tests.
  • Example #3 A physician in a group practice orders a diagnostic test that is preformed by a technician who is a part-time employee. The test is performed in the office of the group practice. The PC is performed by physician who is an independent contractor of the group practice in the group practice’s office. In this example, the Purchased Diagnostics Rule would not apply to either the PC or the TC.
  • Example #4 Same facts as Example #3, except that the independent contractor physician performs the PC in his or her home and reassigns the right to payment to the group practice. Here, the Purchased Diagnostics Rule would not apply to the TC but would apply to the PC because the PC is not performed in the “office of the billing physician or supplier.”
  • Example #5 A group practice purchases both the PC and the TC from a laboratory and bills Medicare globally for the test. In this example, CMS takes the position that the Purchased Diagnostics Rule would apply to both the PC and the TC, because each was purchased. CMS remarks that the location at which the various components were performed is irrelevant because each component was purchased.
  • Example #6 A group practice orders a diagnostic test from an independent laboratory. The laboratory performs the test and contracts with a physician to perform the PC. The laboratory bills Medicare globally for both the PC and the TC. The laboratory is not subject to the Purchased Diagnostics Rule because the laboratory did not order the test.
  • Example #7 Same facts in Example #6, except the group practice must order the test from an Independent Diagnostic Testing Facility (IDTF). Here again, the Purchased Diagnostics Rule would not apply because the IDTF did not order the test.

 Key Changes from the Proposed Rule

In CMS’s examples for the 2008 MPFS, CMS abandoned its proposal that the Purchased Diagnostics Rule apply whenever the applicable component is performed by anyone other than a full-time employee of the billing physician or supplier. Instead, the newly expanded Purchased Diagnostics Rule will look solely to whether the component is purchased and, if not, where the service is performed. If the applicable component of the service (i.e., the TC or PC), is performed in a space other than the “office of the billing physician or supplier,” the component will be subject to the Purchased Diagnostics Rule regardless of the employment or independent contractor status of the person performing the applicable component.

 Impact on Block Lease Arrangements

In the 2008 MPFS, CMS states in commentary that the Purchased Diagnostics Rule “appl[ies] to diagnostic tests performed through block lease arrangements, and the burden is on the billing entity to determine how to calculate its net charge per test.” This position is especially problematic because “block lease” arrangements come in a variety of forms, ranging from the simple sharing of space and equipment to the provision of turn-key services necessary to furnish the diagnostic test.

In the first instance, application of the Purchased Diagnostics Rule seems to hinge on where the applicable component is being furnished; that is, if the block leased space is provided at a location that qualifies as the “office of the billing physician or other supplier” (i.e., space in which the physicians provide substantially their full range of patient care services), the Purchased Diagnostics Rule should not apply. Otherwise, the anti-markup rule will be in effect.

In the second instance (i.e., the turn-key provision of services necessary to furnish the diagnostic test), we presume that CMS would take the position that such arrangement is the equivalent of the purchase of the service and, therefore, the expanded Purchased Diagnostics Rule would apply. Nonetheless, CMS’s rather terse handling of the subject fails completely to address the issue that most law firms rely upon in concluding that the Purchased Diagnostics Rule, at least historically, did not apply to many common block lease arrangements; that is, either the billing physician or supplier is supervising the diagnostic service or actually furnishing the diagnostic service because there exists sufficient indicia of furnishing the diagnostic test because the diagnostic test is furnished under the direction, insurance, protocols, etc., of the billing physician or supplier.

Drinker Biddle has had informal discussions with CMS, and we expect CMS to issue a Questions and Answers to address the number of inquiries and concerns that they have received since issuance of the 2008 MPFS, which should be available prior to January 1, 2008. At the very least, we expect this guidance to address specific issues regarding the calculation of net charges and to more precisely define what space should be included in the definition of “office of the billing physician or other supplier.”

4.  Diagnostic X-Rays, Labs and Other Diagnostic Tests May Not Be Billed as Incident to Services

In Phase III, CMS has clarified the definition of “incident to” services specifically to exclude those services and supplies that have their own benefit category under 1861(s)(3) of the Social Security Act. This means that diagnostic X-ray tests, diagnostic lab tests and other diagnostic tests, all of which are specifically listed as a single category of benefit under Section 1861(s)(3), may not be billed as “incident to” services. With respect to the Stark Law, this means that group practices whose compensation structures include direct credit for incident to services may not include such diagnostic X-rays, labs and other tests that are performed by a nurse or other technician under the supervision of the billing physician within that physician’s compensation formula.

5.  Modifications to the Personal Service Arrangements Exception

The Stark Law has long included a personal service arrangement exception, which permits remuneration from a DHS entity to a physician or his or her immediate family member if several conditions are met. Among the exception’s requirements are that (i) the arrangement must be set out in writing, signed by the parties, and specify the services covered under the arrangement; and (ii) the term of the arrangement must be for at least one year.

In the Phase II final rule, CMS had previously clarified that, although an arrangement must be for at least one year, an arrangement may be terminated during the term, with or without cause, so long as the parties do not enter into the same or substantially the same arrangement during the first year of the original term.

The Phase III rule includes one additional modification to the personal service arrangements exception. Specifically, CMS now permits holdover arrangements for up to six months following the expiration of an agreement that was in effect for at least one year, so long as the arrangement otherwise satisfies the requirements of the exception, and so long as the holdover personal service arrangement is on the same terms and conditions as the immediately preceding agreement.

6.  CMS Is Serious About Compliance with the Nonmonetary Compensation Exception

The nonmonetary compensation exception excludes compensation paid by a DHS entity to a physician (or the physician’s family member) from those that constitute a prohibited financial relationship if the compensation is provided in the form of items or services that do not exceed $329 in calendar year 2007 (adjusted annually for inflation) and (i) is not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician; (ii) was not solicited by the physician or the physician’s practice (including employees and staff members); and (iii) does not violate the Anti-Kickback statute.

In Phase III, CMS made two substantive changes in the nonmonetary compensation exception, one providing a mechanism for correcting noncompliance and the other modifying the scope of what counts toward the limit.

First, the exception has been revised to contain a “cure” provision. Where a DHS entity discovers it has provided nonmonetary compensation to a physician in excess of the calendar-year limit, the compensation will be deemed to be within the limit if the physician repays the excess amount. This should not be construed as a signal, however, for DHS entities to disregard their obligations to track nonmonetary physician compensation. The rule permits a cure only if the excess does not exceed 50% of the limit. Once the excess compensation is discovered, the physician must repay the excess by the end of the calendar year in which the compensation was received or within 180 days from the date the compensation was received, whichever is earlier. Additionally, the DHS entity cannot use this cure mechanism more than once every three calendar years with the same physician.

The second substantive change to the nonmonetary compensation exception permits a DHS entity that has a formal medical staff to provide one local function, open to all physicians on the medical staff, without counting the value of the event toward the monetary limit. A holiday party is the example of such an event cited in the preamble to the Phase II final rule. The rule makes clear, however, that door prizes or other freebies given to physicians at the event will count toward the yearly limit on nonmonetary compensation.

According to CMS, the DHS entity should use fair market value, defined as what the physician would . have paid and not what the DHS entity paid, in tracking the total value of the nonmonetary items or services provided to physicians. This means that items and services such as free haircuts, manicures, massages, golf tournaments and tickets to plays and sporting events may or may not be “small” services under this exception and can add up quickly.

CMS clarified that the limit applies to each DHS entity within a health system and not to the parent health system. CMS declined, however, to make any other expansive readings of the exception. For example, when commentators suggested that meals provided to physicians who are board members or who attend off-site business meetings for the hospital be ignored in calculating the limit, CMS retreated to a “facts and circumstances” response and invited parties to submit advisory opinion requests for situations not covered in the regulations.

Elsewhere, the Stark III regulations provide insights into what CMS considers “best practices” in complying with this exception. More specifically, CMS advises that:

  • DHS entities should delay billing for DHS services from a physician who has received nonmonetary compensation in excess of the limit until after a cure has been made.
  • DHS entities should establish a system for tracking and valuing the nonmonetary compensation provided to each physician and the physician’s family member.

Taken as a whole, the Phase III changes should be read to mean that CMS is serious about enforcing its limits on the provision of nonmonetary compensation by DHS entities to referring physicians, and that a hospital’s belief that it provides only de minimis amounts of such compensation to physicians will not be taken at face value unless the hospital tracks and can prove that the value of items and services provided to medical staff members do not materially exceed CMS’s set annual limit.

7.  The Compliance Training Exception Now Includes Continuing Medical Education (CME) Programs if the Primary Purpose of the CME Is Compliance Training

In the Phase II final rule, CMS expanded the compliance training exception in several key areas. Most significant, the exception was expanded from covering local compliance training offered by hospitals to physicians practicing in the community to include local compliance training offered by any entity furnishing DHS to local physicians and such physicians’ office staffs. CMS, however, explicitly refused to expand the exception to permit compliance training programs for which CME credit is available. In Phase III, CMS backs away from this absolute prohibition to allow training programs that include CME credit to fit within the exception if compliance training is the primary purpose of the program. CMS cautions, however, that the exception does not protect traditional CME content provided under the guise of “compliance training.”

CMS also confirmed that Internet-based compliance training can qualify as “local” training if the training is accessed by the trainee while he or she is physically within the entity’s local community or service area. CMS did not provide any guidance on how an entity furnishing DHS should document such local access. Presumably, however, including an attestation by the physician or staff member that he or she is accessing such information while in the local community (or service area) would be sufficient.

CMS refused to expand the exception to allow the entity furnishing compliance training to reimburse the physician for out-of-pocket expenses if the physician obtained training outside of the entity’s local community or service area.

8.  Changes to the Exception for Intra-Family Rural Referrals

The Phase II final rule created a new exception for certain referrals from a physician to his or her immediate family member or to a DHS entity with which an immediate family member has a financial relationship where the patient resides in a rural area. Specifically, the exception permits referrals provided that: (i) the patient resides in a rural area and there is no other person or entity available to furnish the service in a timely manner either (a) at the patient’s residence (for services required to be furnished in the patient’s home), or (b) within 25 miles of the patient’s residence (for services required to be furnished outside the patient’s home); and (ii) the referring physician or family member must make reasonable inquiries as to the availability of other persons or entities to furnish the service within the 25-mile area.

In Phase III, CMS has modified the exception to include an alternative to the 25-mile distance test. Specifically, the exception now permits referrals to im. mediate family members if a service is otherwise not available within 45 minutes transportation time from the patient’s home at the time the referral is made. Parties are free to choose either the 25-mile test or the 45-minute test. In the comments to the Phase III final rule, CMS made two specific clarifications. First, whichever test the referring physician chooses must be used both for determining the distance or transportation time and for the physician’s reasonable inquiry as to the availability of other persons or entities to provide the needed service. Second, the new alternative test requires a case-by-case assessment of conditions at the time of the referral. For example, a referral that is permissible in the winter because mountain roads may not be passable, may not be permissible in the summer months when a shorter route is available. Providers utilizing the 45-minute test should maintain documentation of the information used in determining the transportation time.

9.  Minor Modifications to the Fair Market Value Compensation Exception

In the Phase I final rule, CMS adopted an exception for fair market value compensation arrangements protecting compensation from a DHS entity to a physician, an immediate family member or a group of physicians for the provision of items or services by the physician or group to the DHS entity if several conditions are met, including: (i) the arrangement is set out in writing, is signed by the parties, and describes the items or services; (ii) the writing specifies the compensation which is set in advance, is consistent with fair market value, and is not determined in any manner that takes into consideration the value or volume of referrals or other business generated between the parties; (iii) the writing specifies the timeframe for the arrangement, which can be for any period of time (provided that the parties enter into only one arrangement for any item or service during the course of a year); (iv) the arrangement is commercially reasonable and furthers the legitimate business purposes of the parties; and (v) the arrangement does not violate the anti-kickback statute or involve the counseling or promotion of any business arrangement that violates any federal or state law.

The Phase III rule incorporates one substantive change and one clarification to the fair market value exception. First, the exception has been expanded to include items or services provided by the entity to a physician (or an immediate family member) or a group of physicians. The exception previously protected only arrangements for the provision of items or services by the physician or group to the entity. Second, the rule clarifies that the fair market value exception does not apply to the rental of office space. Lease arrangements must comply with the rental of office space exception.

10.  To Lawfully Provide Professional Courtesy Discounts, DHS Entities Need Not Notify Insurers of the Waiver of Co-Pays or Deductibles

In the Phase II final rule, CMS clarified (after much speculation) that professional courtesy discounts provided to members of a hospital’s medical staff and their families are permissible if the medical staff members are not Medicare or Medicaid beneficiaries 10. in financial need. Among the criteria for satisfying the professional courtesy exception under Phase II, CMS required hospitals to inform private insurers of the reduction if the discount included any complete or partial waiver of a coinsurance obligation. In response to public comment, in the Phase III final rule, CMS has deleted the third-party insurer notification requirement. CMS has also clarified that the exception applies only to hospitals and other providers with formal medical staffs. This is in part due to CMS’s belief that physician-to-physician courtesy discounts should not require an exception unless the recipient physician is a source of DHS referrals to the physician or practice extending the professional courtesy.